National Budget sets up small business tax reforms

On February 26, South Africa's Minister of Finance Pravin Gordhan presented his 2014 Budget, which included the first measures arising out of the deliberations of the Tax Review Committee, headed by Judge Dennis Davis, that he had set up in July 2013 with a broad brief to make recommendations for possible tax reforms.

The Committee's recommendations, which Gordhan has accepted, relate to the compliance burden of small and medium-sized enterprises. In particular, the turnover tax regime, for businesses with an annual turnover of up to ZAR1m (USD93,000), will be amended to further reduce the tax burden on such enterprises.

It is proposed that the requirements of the tax should be simplified, and its thresholds and tax rates should be adjusted. It is proposed that turnover up to ZAR335, 000 should not be taxed, and that the maximum tax rate should be reduced from the current 6 percent to 5 percent.

Consideration is also being given to replacing the graduated tax structure for small business corporations with a refundable tax compliance credit, while amendments will be made to the venture capital company tax regime. Subject to appropriate tax treatment, amendments will be made to the intellectual property rules as part of this reform.

Gordhan confirmed that the Davis Committee has now started working on base erosion and profit shifting. During 2014, work will be undertaken on the impact of the tax system on economic growth and job creation, and aspects of value added tax, mining taxes and estate duties.

He also announced that, in the Budget, personal income tax relief by the adjustment of tax brackets and rebates would amount to ZAR9.25bn, with about 40 per cent of that relief going to South Africans earning below ZAR250,000 per year.

There would also be an increase in the tax-free lump-sum amount paid out of retirement funds from ZAR315,000 to ZAR500,000, to the benefit of those on lower incomes who did not benefit from deductible contributions, and he confirmed that legislation to allow for tax-exempt savings accounts will proceed this year, to encourage household savings. The account will allow investments in bank deposits, collective investment schemes, exchange-traded funds and retail savings bonds.

Reforms to the tax treatment of risk business for long-term insurers are also proposed. Profits from the risk business of a long-term insurer will be taxed in its corporate fund, similar to the way short-term insurers are taxed.

Gordhan further disclosed that, while, following public consultation, the National Treasury and the Department of Environmental Affairs have agreed that a package of measures is needed to address climate change and to reduce emissions, implementation of the carbon tax is to be postponed by a year to 2016, to allow for further consultation.

Also with regard to the environment, and the regulatory and other measures that have been put in place to address acid water drainage from old gold mines, particularly around Johannesburg, consultations will be initiated with the mining sector on an appropriate funding mechanism to make sure that it makes its fair cost contribution.

Within the general budgetary situation, Gordhan disclosed that, despite the continuing global economic and financial uncertainty, South Africa has continued to experience growth, albeit at a slower rate than had been predicted. Gross domestic product (GDP) growth is now expected to reach 2.7 percent this year, increasing to 3.5 percent by 2016.

However, despite the slower economic growth at present, the 2013/14 budget deficit is projected to be 4 percent of GDP, lower than had been projected in October, and with tax revenue expected to be ZAR1bn higher than the ZAR899bn projected in 2013 Budget. A similar deficit is expected for 2014/15 fiscal year, narrowing to 2.8 percent of GDP over the next three years. Net debt should stabilize at about 45 percent of GDP in 2016/17.

In fact, exporters are currently benefiting from the recent significant weakening of the South African Rand (part of the financial effects on emerging economies of the slowdown in quantitative easing by the US Federal Reserve), which has increased corporate income tax receipts. Revenues are also rising from individual income tax, after above-inflation wage increases, and from a rise in customs duty after increased import values.

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